How to Avoid the Balance Transfer Trap

January 14, 2014

Balance transfer cards can be a useful tool for reducing your interest rate and helping you pay off your debt faster. With the right balance transfer offer, more of your monthly payment can go to the principal, and you will pay less over time – in addition to getting out of debt quicker.

Unfortunately, as with so many financial tools, when used improperly a balance transfer card can actually cause more problems. In some cases, a balance transfer can result in a delay to paying off debt – and can even lead to an increase in debt.

Understand Balance Transfer Terms

Before you sign up for a balance transfer, make sure that you understand the terms involved. The terms of the balance transfer can have an impact on how effective it is when it comes to paying down your debt:

Introductory Period

First, look at the length of the introductory period. When that period ends, your interest rate might go higher. A six-month intro period may not give you a lot of time to make progress on your debt. You need to be aware of that, and do what you can during the 0% APR period. Your best results will come from a longer period. If you qualify, a period of 18 months can be very helpful indeed.

Balance Transfer Fee

Many balance transfer cards charge fees of between 3% and 5% of the balance transfered. If you have a large balance, and the fee is 4% or 5%, the fee will impact your interest savings – especially if you have a shorter six-month or nine-month intro period. Run the numbers to make sure that you really are coming out ahead.

May Not Get 0%

Sometimes, instead of receiving a 0% balance transfer rate, you might end up with 1.99%, 2.99%, or 3.99%. This can still be a good deal, though, if you have high interest debt. In some cases, you might be better off choosing a 3.99% lifetime balance transfer than going with a 0% transfer that takes effect for only six months. Carefully consider the options and the realities of your situation.

Understanding the terms of the balance transfer can help you make a more informed decision. However, you want to plan it so that you pay off as much as possible during the intro period so that when the interest rate heads higher, you aren’t stuck paying so much in interest that your debt repayment efforts slow to a crawl again.

The Real Issue: “Freeing” Up Room for More Spending

The largest trap associated with balance transfer, though, is the fact that once you move your balances to a new card, it can be tempting to view the “freed up” credit card as “available” money. You could actually end up in worse shape that you were in before.

If you get a new credit card with a 0% balance transfer offer, you might move your high interest balances over. Now that your old debt is on the new card, you have room on your old credit card. If you don’t cancel that card (canceling a card comes with its own credit score implications), you need to be careful about using it. Otherwise, you’ll start racking up the high interest debt again – before your old debt is retired.

Your best defense against this problem is to cancel the credit card. If you are reluctant to take that step, though, you should lock the card away. Put it on ice, or lock it in your fireproof safe. Put it out of the way so that you aren’t tempted to use it.

The reality is that a balance transfer will only really help if you are making true changes in your financial behavior. As long as your money habits remain the same, you will not be able to get out of debt – no matter how many balance transfers you use.

Have you ever transferred your balance to a new credit card? Leave a comment!

This article was originally published November 5, 2012.

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Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

Comments

3 Responses to How to Avoid the Balance Transfer Trap

My wife 7 I used to play the balance transfer “shuffle” often enough, it seemed – when we were young, dumb, and hadn’t really given too much thought to how to really maange our personal finances. Neither of us was really tough (by our parents) how to manage our money – and both sets of parents are still dealing with their past decisions. Thanks to some steep obstacles that we’re overcoming, and much better decision-making, we know exactly how and under what circumstances balance transfers would work for us. thanks for the informative post!

@Miranda: The balance transfer fees are really a way to charge interest. I hope all consumers see through such offers. I generally try not to carry any balance month over month, so I ignore most of there offers.

However these offers can be a good place to start if you are

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I'm Ben Edwards and I've been addicted to personal finance since I was 12 years old.

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